FD Rules: What happens to your money if the bank collapses? Know these rules before opening an FD..

We all rely on Fixed Deposits (FDs) or Savings Accounts to safeguard our hard-earned, lifelong savings. The common perception is that money kept in a bank is completely secure and immune to any risk. However, the reality of the financial world differs slightly from this assumption. Unfortunately, if your bank were to go bankrupt or collapse due to a financial crisis, your entire deposited amount would not be fully protected. Under a specific regulation, you could potentially suffer significant financial losses. Let us understand just how secure your hard-earned money truly is and what rules govern it.

How ​​Much Money Is Completely Safe?
Within India's banking system, the responsibility for providing security to depositors' funds lies with the Deposit Insurance and Credit Guarantee Corporation (DICGC). This institution provides insurance coverage to every depositor, but there is a prescribed maximum limit to this coverage. This insurance cover applies only to deposits up to a maximum of ₹5 lakh. It is important to note that this ₹5 lakh limit encompasses all your accounts—including Savings Accounts, Current Accounts, Fixed Deposits (FDs), and Recurring Deposits (RDs). Simply put, if you have deposited a total of ₹10 lakh or ₹12 lakh across various accounts within a single bank, you will receive only ₹5 lakh back in the event of that bank's failure. The remaining amount remains directly exposed to risk.

What Are the Rules Regarding Multiple FDs in the Same Bank?
Many investors harbor the misconception that by splitting a large sum into multiple separate FDs, they can enhance the security of their funds. For instance, instead of opening a single FD of ₹10 lakh, some individuals opt to open five separate FDs of ₹2 lakh each. However, the reality is that if all these FDs are held within the same bank, the total insurance coverage remains capped at ₹5 lakh. Merely increasing the number of accounts does not increase the guarantee of your investment's security.

**How ​​Can You Safeguard Your Entire Amount?** If your total accumulated savings exceed ₹5 lakh, it is essential to take strategic steps to safeguard them. The most effective and simplest way to do this is to distribute your funds across multiple banks rather than keeping the entire amount in a single institution. For instance, if you have savings of ₹15 lakh, you could deposit ₹5 lakh in Bank ‘A’, ₹5 lakh in Bank ‘B’, and the remaining ₹5 lakh in Bank ‘C’. By doing so, your entire sum of ₹15 lakh would fall within the insurance coverage ambit of the DICGC.

Understand the Risks Associated with Smaller Banks
In addition to diversifying across different banks, you can also easily expand the scope of your financial security by utilizing the names of various family members. For example, you could deposit ₹5 lakh in your own name, ₹5 lakh in your spouse's name, and ₹5 lakh in a joint account. Legally, this ensures that each account benefits from a separate and distinct insurance cover.

Nowadays, many smaller banks and Small Finance Banks offer interest rates significantly higher than those of conventional banks in an effort to attract customers. While investing in these banks may yield attractive returns, the potential for risk is commensurately higher. Therefore, to avoid jeopardizing your entire savings, refraining from depositing amounts exceeding ₹5 lakh in such smaller institutions proves to be a prudent decision.

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